June 30, 2011
FAQ: Rebound Effects and the “Energy Emergence” Report
The Breakthrough Institute recently released a new, comprehensive survey of the literature and evidence concerning the rebound effects triggered by many energy efficiency improvements. "Energy Emergence: Rebound and Backfire as Emergent Phenomena" explains why energy efficiency measures that truly 'pay for themselves' will lower the cost of energy services – heating, transportation, industrial processes, etc. – driving a rebound in energy demand that can erode a significant portion of the expected energy savings and climate benefits of these measures.
On February 17, the Breakthrough Institute released a new, comprehensive survey of the literature and evidence concerning the rebound effects triggered by many energy efficiency improvements.
"Energy Emergence: Rebound and Backfire as Emergent Phenomena" explains why energy efficiency measures that truly 'pay for themselves' will lower the cost of energy services – heating, transportation, industrial processes, etc. – driving a rebound in energy demand that can erode a significant portion of the expected energy savings and climate benefits of these measures.
This new set of Frequently Asked Questions explains rebound effects, how they operate, what kinds of energy efficiency improvements trigger bigger or smaller rebounds, and why coming to terms with the full scale of rebound challenges the heart of many contemporary climate mitigation strategies.
A: Increasing the efficiency of an energy consumptive activity will lower the cost of the services derived from that activity – that is, it will change the price of the "energy services" derived from the fuels, such as lighting, transportation goods or services, heating or cooling, industrial processes, etc.
Economic actors respond to price changes in two general ways:
1. Increasing the utilization of that energy service to increase outputs or incomes. For example, a low-income resident may now heat his or her home more often or heat more areas of the home after weatherizing their home, because it is now far more affordable to heat. (In economics speak, this involves 'elasticities of demand,' or the responsiveness of demand to changes in the price of goods and services)
2. Re-arranging the factors of production or goods and services consumed to substitute now-cheaper energy services for other goods or services (maintaining the same level of output or income). For example, a more efficient heat plant may enable a chemicals plant or metals smelter to raise temperatures in industrial processes to extract high quality product from poorer quality inputs (substituting energy for materials) or to reduce process times (substituting energy for labor). (In economic terms, this involves 'substitution elasticities,' or the ability of firms or consumers to take advantage of lower prices to productively re-arrange the production inputs or consumer goods they utilize).
Both of these dynamics are "rebound effects," a term for any economic mechanism that leads to a rebound, or increase, in demand for energy following an improvement in energy efficiency that lowers the effective cost of that energy service.
There are other rebound effects as well (for a quick description of each, see the summary here). Our report, "Energy Emergence" surveys more than half a dozen distinct rebound mechanisms, some of which are fairly direct (like the two above), others that are more indirect (like the impact of money saved through efficiency measures as it is re-spent in the economy on other goods or services that in turn require energy to produce). Still more effects are only visible in the aggregate, at the macro-economic scale, as economies respond in a variety of ways to widespread improvements in energy efficiency.
Q: So do rebound effects wipe out all of the energy savings from efficiency improvements?
A: No, not always. Although in some cases, it is possible that efficiency improvements will "backfire," driving a rebound in energy that fully compensate for the initial energy savings, increasing energy demand overall. While backfire is by no means the norm, it is possible in some cases (we'll explore conditions that are likely to lead to backfire in a later question).
As "Energy Emergence" concludes, "Rebound effects are real and significant, and combine to drive total economy-wide rebound in energy demand with the potential to erode much (and in some cases all) of the reductions in energy consumption expected to arise from below-cost efficiency improvements."
Think of it this way: rebound effects mean that for every two steps forward we take in energy savings through efficiency, rebound effects take us one (and sometimes more) steps backwards. We may still move forward, but not as much as we initially expected.
Q: So what's the big deal? We still make progress right? Why do rebound effects matter?
A: Rebound matters because the magnitude of rebound effects determines how effective below-cost efficiency improvements are at contributing to lasting reductions in total energy use and therefore greenhouse gas emissions.
Energy efficiency has frequently been cited as the single greatest contributor to emissions reduction and climate mitigation strategies, by everyone from the International Energy Agency and Intergovernmental Panel on Climate Change to consultants like Amory Lovins' Rocky Mountain Institute and McKinsey to efficiency advocates and environmental NGOs. The IEA counts on efficiency for roughly half of the emissions reductions needed in their "Blue Map" climate stabilization scenario (graphic below), for example, while President Obama told reporters in 2009 that with efficiency, "we can save as much as 30 percent of our current energy usage."
So we're counting on energy efficiency to do quite a bit of "climate mitigation work," so to speak.
The problem is that all of these estimates are based on an assumption: that energy efficiency reduces energy demand in a linear, direct, and one-for-one manner. An X% gain in efficiency leads to an equivalent X% reduction in total energy use.
But the economy is anything but direct, linear, and simple, especially when responding to changes in the relative price of goods and services. When a good or service or input to production gets cheaper, consumers and firms use more of it, find new cost-effective uses for it, re-invest any savings in other productive activities, and the economy overall gets more productive overall, driving economic growth and activity.
That's the rebound effect, and it means that we can't assume that improving energy efficiency by 20%, for example, will reduce energy demand by 20%.
If we don't accurately and rigorously account for rebound effects, we risk over-relying on energy efficiency to deliver lasting reductions in energy use and greenhouse gas emissions, and we will fall dangerously short of climate mitigation goals.
Q: But I've always heard that rebound effects are really small. Amory Lovins has written that "we are observing only very small rebound effects (if any at all) in the United States," for example. He says that we don't drive our cars twice as much just because they are twice as efficient, for example. How big a deal is this?
A: Rebound effects differ in scale, depending on the type of energy efficiency improvements we're talking about, and where in the economy we look. In very few cases are rebound effects "very small" or insignificant.
Dozens of academic studies have examined the empirical evidence, conducted modeling inquiries, and otherwise tested the scale of rebound effects. While there is much more work to be done to determine the precise scale and impact of rebound effects in different circumstances, the conclusion is that rebound effects are significant and cannot be ignored in energy and climate analysis and policymaking. See the following three questions for summaries of the scale of rebound in different circumstances...
Q: So how large would rebound be if we improve end-use consumer energy services like personal transportation or home heating or appliances?
A: In rich, developed nations, if we improve the efficiency of end-use consumer energy services, like cars, home heating and cooling, or appliances, the literature indicates that direct rebound effects alone are typically on the scale of 10-30% of the initial energy savings. Additional indirect and macroeconomic effects may mean total rebound erodes roughly one quarter to one third of expected energy savings in these situations.
Rebound here is smallest in cases when demand for the energy service in question is already saturated (that is, we use as much of it as we would care to use), and highest in cases where the cost of the energy service is a key constraint on fulfilling demand for that service. For example, if a wealthy homeowner already reliably heats all the rooms in his or her house to 70 degrees, he/she wouldn't increase the thermostat to 77 degrees just because our heating system got 10% more efficient. But if a poorer household can't afford to turn the thermostat up, or only heats one room of the house with a small space heater, because the house is too drafty, then if the house gets weatherized and more efficient, that household is likely to use more energy to heat their home. In general, end-use consumer efficiency improvements in rich, developed economies will still lead to a net savings in energy, although rebound effects shouldn't be ignored even here.
Q: Should we expect rebounds to be the same in rich and poor nations?
A: No, rebound effects are almost certainly larger in poorer, developing nations.
For efficiency in end-use consumer energy services in developing nations, direct rebound effects alone are likely to be much higher than in richer nations, on the order of 40-80%. Rebound is higher here because demand for energy services is far from saturated, demand is far more elastic (responsive to changes in price), and the cost of energy services is often a key constraint on the enjoyment of energy services. This is important, because growing demand in developing nations is the principal driver of energy demand growth worldwide.
We should be very careful in generalizing our experiences or intuitions about rebound effects in rich, developed nations to the larger bulk of the global population living in developing economies. As Lee Schipper and Michael Grubb wrote in 2000:
"In low-income economies, energy and energy costs are often a constraint on economic activity. ... In short, the shadow of Jevons lurks [in developing nations] for precisely the same reason that more efficient use of coal [in Jevons' Britain] did not save coal: the combined effects of different rebounds are very important when energy availability, energy efficiency, and energy costs are a significant constraint to activity and therefore energy use."
Since expanding the supply of energy services is a key constraint on economic activity in developing nations, the macro-economic impact of efficiency improvements in developing economies is also likely to be more significant, helping developing economies grow faster (and thus consume more energy).
Q: What about industrial efficiency improvements? Does making a business or a factory more efficient trigger energy demand rebound?
A: While more study of rebound effects for efficiency improvements at producing firms (e.g. industry and commerce) is needed, the literature to date indicates that direct rebound effects may be on the order of 20-70% for these sectors, with additional rebound due to indirect and macroeconomic effects.
Rebound effects in firms depend principally on the ability of firms to rearrange their factors of production (labor, capital, energy, and various materials) to better take advantage of now-cheaper energy services. This is especially true for new productive capacity. If long-term substitution is high, rebound effects can be substantial. In addition, output effects contribute to rebound for energy intensive firms with a high elasticity of demand for their products (that is, where consumers are very responsive to changes in the price of their products and demand more product as the price falls).
Improvements in energy productivity at firms can also contribute to greater economic activity and growth, driving up energy demand overall. In general, rebound effects are higher for efficiency in productive sectors of the economy than for end-use consumer efficiency. This is notable, because two-thirds of the energy consumed in the U.S. is consumed in the productive sectors of the economy and "embedded" in the non-energy goods and services purchased by consumers.
Q: What happens if we pursue efficiency improvements across an entire sector or economy? If we make the entire U.S. economy more efficient, for example, should we still expect rebound effects?
A: Yes. At the economy-wide, macro-economic scale, the aggregate impacts of widespread energy efficiency improvements can lead to substantial rebound effects, as producers and consumers respond in turn to various cascading changes in the price of goods and services, the pace of economic growth quickens, and market prices for fuels may fall, driving a further rebound due to market price effects. Since these economic responses are complex and varied, economic modeling is most often used to estimate the scale of macroeconomic rebound due to aggregate efficiency improvements.
A number of 'Computable General Equilibrium' models (see page 34 of the study) generally show rebound at the scale of a national economy of 30-50% or greater, with a surprising number predicting rebound greater than 100% (aka 'backfire'). These studies look at national economies and thus ignore global, macro-economic impacts beyond national boarders, which can add additional rebound in energy consumption.
'Integrative modeling,' a more detailed approach utilized by energy analysts at Cambridge, found that if the world adopted all of the "no regrets" energy efficiency policies suggested by the International Energy Agency, then rebounds effects would erode more than half of expected savings (52%) in the long-term. There are also several reasons to think this is may be a conservative estimate (see pages 39-40 of the study).
At the macro-economic, global scale most relevant to climate change mitigation efforts, then, rebound effects can be substantial, and erode much (if not all) of the expected energy savings and climate benefits.
Q: When is backfire likely to occur? Are there times when rebound wipes out ALL of the savings from energy efficiency?
A: Rebound is likely to be particularly acute and is most likely to trigger backfire (rebound >100% of initially expected energy savings) in the following cases:
1. If the supply of energy services is a key constraint on economic activity and growth (as it is in much of the developing world), then improvements in energy efficiency are likely to trigger acute rebound or even backfire. In a world where roughly 1.6 billion people lack access to electricity and 2.5 billion rely primarily on primitive biomass (e.g., wood and dung) for cooking and heating, huge pent-up demand for energy services persists and the availability of energy services will be a major determinant of future rates of economic growth and progress. This in turn indicates potential for very large rebounds for efficiency improvements in developing nations.
2. When more efficient (and thus lower cost) energy services open up new markets or enable widespread new energy-using applications, products, or even entire new industries to emerge. We dub this dynamic a 'frontier effect' in our report, because in these cases, the 'production-possibility frontier' for an energy-using technology expands significantly, opening up unforeseen opportunities for substitution and potentially significant impacts on economic activity and the composition of the economy. In such cases, backfire is the most likely outcome. Backfire due to this 'frontier effect' dynamic is most likely to arise for 'general-purpose technologies' that have a wide scope for improvement and elaboration, have potential for use in a wide variety of products and processes, and have strong complementarities with existing or potential new technologies. Examples of 'general-purpose technologies' could include steam engines, electric motors, lighting, gas turbines, semiconductors and computing technologies, lasers, robotics, radio transmitters, and perhaps many others. Backfire is most likely to result after energy efficiency improvements in these general-purpose technologies. (See p. 47-8 of the report.) These emergent 'frontier effect' dynamics may prove particularly challenging for energy analysts to forecast or account for in modeling efforts, as they necessarily involve unforeseen and unpredictable applications of new and improved technologies. This means that forecasts of rebound can easily underestimate eventual rebound due to frontier effects triggered by sustained efficiency gains.
3. When energy efficiency improvements not only improve the productivity of energy, but also result in simultaneous improvements in other factors of production, such as labor or capital (a 'multi-factor productivity improvement'), an outsized impact on economic output and significant rebound in energy demand can arise.
Very large rebound or backfire is likely the norm in cases of 'win-win' efficiency opportunities, where energy-saving technical changes simultaneously improve the productivity of other factors of production, multiplying the impacts on output, economic growth and energy demand.
For example, in a 2005 paper, efficiency consultant Amory Lovins writes:
"Improved energy efficiency, especially end-use efficiency, often delivers better services. Efficient houses are more comfortable; efficient lighting systems can look better and help you see better; efficiency motors can be more quiet, reliable, and controllable; efficient refrigerators can keep food fresher for longer; efficient cleanrooms can improve the yield, flexibility, throughput, and setup time of microchip fabrication plants; ... retail sales pressure can rise 40% in well-daylit stores ... Such side- benefits can be one or even two orders of magnitude more valuable than the energy directly saved. ... In efficient buildings, ... labor productivity typically rises by about 6-16%. Since office workers in industrialized countries cost ~100x more than office energy, a 1% increase in labor productivity has the same bottom-line effect as eliminating the energy bill - and the actual gain in labor productivity is ~6-16x bigger than that."While the multi-factor productivity improvements Lovins describes greatly improve the economic case for energy efficiency upgrades, they simultaneously raise the specter of significantly greater rebound in energy demand than if the improvement in energy productivity were considered alone (as is common in the inquiries discussed in prior sections). If the economic impact of labor productivity improvements from efficient buildings is several orders of magnitude greater than the simultaneous savings in energy consumption, for example, then the rebound due to economic growth/output effects alone should also be several orders of magnitude greater than would be predicted if the energy savings were considered alone.
Q: Are you saying energy efficiency is a waste of time then? Are you arguing against pursuing efficiency?
A: Most certainly not! Truly cost-effective energy efficiency improvements make great economic sense and improved energy efficiency may be a key determinant of future economic welfare. In this sense, it may also contribute indirectly to climate mitigation and decarbonization objectives (see "Discussion and Implications" section of our report).
As Skip Laitner of the American Council for an Energy Efficiency Economy writes, "our lagging efforts on efficiency may actually constrain our larger economic productivity."
As we note in our report, this is often the case, particularly in the developing world. Pursuing cost effective energy efficiency opportunities makes great sense then from an economic development and human welfare perspective. At the same time, however, this is precisely why energy efficiency can trigger significant rebound effects that reduce the ability of efficiency to drive down total greenhouse gas emissions, even as efficiency contributes significantly to greater economic growth.
In short, unlocking the full potential of efficiency may mean the difference between a richer, more efficient world, and a poorer, less efficient world. The former is clearly the desirable case, and the one we should all strive for! But in either case, the world will use more or less the same amount of energy. In some parts of the economy, efficiency may reduce overall energy use, while in others it may increase it. The net effect, after accounting for efficiency's role in unlocking economic growth (among other rebound effects) is far from a linear and direct reduction in energy use.
We therefore argue that we should continue to pursue any cost-effective efficiency opportunities on economic grounds, even as we reconsider the degree to which these measures will contribute to climate mitigation efforts.
As we state in the report:
"In any case, truly cost-effective energy efficiency measures should be vigorously pursued, as they will lead to an improvement in general welfare (at least narrowly construed in economic terms). However, from a climate mitigation perspective, we must be keenly aware of the precise, macroeconomic impacts of energy efficiency improvements, since only a reduction in total aggregate energy consumption will directly contribute to emissions reduction objectives. This in turn requires an understanding and analysis of the non-linear combination of impacts on economic activity, demand for energy as a factor of production, and other macroeconomic factors that are together summed up in the term 'rebound effect.'"
Q: Are you saying that rebound effects are the reason energy use has continued to rise? Isn't energy use just growing because the economy is growing and richer people are using more energy?
A: Rebound effects are part of the reason that energy use is still growing, even as the economy gets more and more efficient. True, economic growth drives up energy use, even as we get more efficient. But those two terms - economic growth, and energy efficiency - are not unrelated, and rebound effects describe the relationship between the two.
Part of the reason the economy continues to grow is because below-cost energy efficiency improvements grow the supply of energy services and increase the productivity of the economy - we get more economic activity and income and welfare out of the same amount of energy - and productivity improvements are a key driver of economic growth.
Some economists argue that the supply of energy services is a key enabling force in economic growth: think about the impact of electric motors, industrial lasers, computing, automation, and all of the other ways in which we use energy - often quite efficiently - to greatly improve the productivity of our economy. Think about how important energy services - lighting, efficient cooking stoves, electricity - are to development outcomes in the emerging economies of the world. Efficiently expanding the supply of energy services may thus be one of the principal factors determining the rate of economic growth in rich and poor nations alike (see the previous question for more).
That said, there are definitely other factors driving economic growth, including improvements in the productivity of other inputs to the economy, such as labor, capital, and other materials. Rebound effects and energy productivity improvements aren't the only driver of economy growth by any means.
Q: But we aren't capturing all the efficiency opportunities out there. If we work harder at efficiency, can't we out pace the rate of economic growth and finally decouple the economy from consuming ever more energy?
A: Overall, the global economy has been growing at the rate of roughly 3% per year. Historically, we've only seen a roughly 1-1.5% improvement in energy use per unit of economic output (energy intensity or productivity) each year.
For energy efficiency gains to outstrip the increase in energy demand driven by the growing economy, the economy must improve energy intensity/productivity by at least 3% per year, roughly double or triple the historic rate of improvement.
So economic growth continues to out-pace energy efficiency improvements, and energy use continues to grow overall.
Efficiency advocates argue that if we work harder at capturing energy efficiency opportunities, we can more than double or triple this rate of efficiency improvement and bend global energy use downwards.
That's a big task already, but at least two factors make this challenge even harder:
• First, a large portion of changes in energy intensity over time can be attributed to structural changes in the economy (Baksi and Green 2007), as economies shift from agricultural to industrial to services-oriented over time. These aren't the technical improvements in transportation, lighting, buildings, or industrial efficiency that energy efficiency policies are concerned with, and these trends are hard to accelerate or effect through policy. They may not continue indefinitely either, so there are limits to gains here. If, for example, one-half or two-thirds of the historic rate in energy intensity improvements are due to sectoral transitions and structural changes in the economy, then efforts to increase the rate of technical efficiency improvement must work two or three times harder to succeed. Instead of a more than doubling or tripling of our efforts, we must achieve a more than four to nine-fold increase in technical efficiency improvements.
• Second, that estimate does not account for rebound effects. Rebound makes the goal even more challenging, as it means efficiency feeds back into energy consumption and economic growth increasing both and making the horizon we're reaching towards recede even further. For every two steps forward we take with below-cost energy efficiency, rebound effects take us roughly one (or more) steps backwards.
For these reasons, we think it is prudent to revisit the ability of below-cost energy efficiency to decouple the economy from growing energy use and drive lasting reductions in climate-destabilizing greenhouse gases. While we should continue to pursue cost-effective energy efficiency measures improvements wherever they may be found, as we write in the report (p. 52):
"Efforts to reliably reduce greenhouse gas emissions or dependence on depleting fossil fuels would be prudent to avoid the risk of overreliance on energy efficiency measures. Such efforts should therefore focus primarily on shifting the means of energy production (rather than end use), relying on zero-carbon and renewable energy sources to diversify and decarbonize the global energy supply system."
Q: Are rebound effects peculiar to energy? Does the same thing happen for labor or other materials
A: While the term 'rebound effect' is generally used by energy economists to talk about rebounds after energy efficiency, the basic economic mechanisms - elasticity of demand and substitution, re-spending effects, and the contribution of productivity to economic growth - are well-understood economic phenomena relevant to improvements in the price or productivity of any factor of production, be it capital, materials, or labor.
Let's consider labor, for example. Economists would never assume that a 20% improvement in labor productivity - aka a "labor efficiency" improvement - would reduce overall demand for labor in the economy by 20%.
Everyone knows that improving labor productivity drives economic growth, creates new profitable ways to utilize labor, and overall generally increases employment at the macroeconomic scope, not decreases it.
Even at the scope of the individual factory or assembly line, improving labor productivity may mean the plant can get by with fewer laborers on the shop floor, but even there, the net effects on demand for labor are far from linear and direct. Higher labor productivity lowers product costs and increase demand for those products and opens up new markets that weren't profitable before. It frees up money to re-invest in other areas of production, and it creates new jobs in other areas of business. Even at the firm level, a 20% improvement in labor productivity won't mean 20% of the company's staff is laid off.
Yet this is precisely the simplified, linear assumption that is routinely made in energy and climate forecasting and scenario planning. A 20% improvement in energy efficiency = a direct, 20% net reduction in energy demand, relative to business as usual.
"Rebound effects" are what energy economists call the same, common sense story we just went over for labor, when we're talking about energy productivity or efficiency rather than labor productivity.
The reality is that energy isn't different from labor, or materials, or capital, and a whole field of academic work has gone on - largely out of notice of mainstream energy analysis and policy making - to explore and illustrate how energy efficiency leads to a series of complex, non-linear response throughout the economy that drive a rebound in demand for energy services and thus a rebound in consumption of energy itself. Our "Energy Emergence" report surveys this evidence and presents key implications for climate mitigation efforts.
Q: Are "Rebound Effects" the same as the "Jevon's Paradox"?
A: More or less, yes. This basic but somewhat paradoxical dynamic - that energy efficiency lowers the price of energy services, leading to a rebound in consumption of those services - was first thoroughly discussed by British Economist William Stanley Jevons in an 1865 book, The Coal Question. He famously wrote, "It is a confusion of ideas to suppose that the economical use of fuel is equivalent to diminished consumption. The very contrary is the truth."
Some people define this so-called "Jevons Paradox" more strictly, saying that the Paradox refers only to cases when the rebound effects triggered by efficiency measures drives more demand for energy than was originally saved by the efficiency improvements. That's a scenario known in the rebound literature as "backfire," a special kind of severe rebound effect that is greater than 100% of the initially expected energy savings. Backfire means improving energy efficiency actually increases energy demand overall, relative to what it would have been if the efficiency measures hadn't been pursued at all. This is precisely what Jevons observed when he noted that the much more efficient steam engine developed by James Watt led to a huge increase in coal consumption during the 19th century, rather than the conservation of Britain's dwindling coal resources.
However, the generalized dynamic Jevons observed: that efficiency lowers the cost of energy services, driving a rebound in demand for those services, not a direct linear reduction in demand or conservation of fuels, is equivalent to what energy economists now call "rebound effects."
Q: Do all energy efficiency improvements trigger rebound effects?
A: No, not all energy efficiency measures trigger rebound effects. Rebound effects are concerned with the response to below-cost efficiency improvements. That's the "low-hanging fruit" we always hear about, the efficiency measures that pay back more in avoided energy use than they cost to install. These are also the ones "below zero" on the often-cited McKinsey and Co. greenhouse gas abatement cost curve seen below. Below-cost efficiency measures always reduce the implicit price of energy services - the useful work provided by energy consumption, be it heating a home, transporting people or goods some distance, powering a production facility, or lighting a work space - and thus always trigger a rebound in demand for those services (see the first question in this series above). It's not a question of whether efficiency measures that truly "pay for themselves" will trigger rebound - they will - the question is how large that rebound will be?
Not all energy efficiency measures are below cost though (the graphic above has arrows pointing to a couple of 'above-cost' efficiency measures, according to McKinsey: plug-in hybrid electric cars, and efficient building design for new buildings). While they incur an economic cost, these efficiency measures should not trigger rebound effects and may still prove effective at reducing energy demand. As we wrote in the report (p. 52):
There is no shortage of opportunities to improve energy efficiency that are not cost-neutral or below-cost. While these measures come with a price tag, in many cases the costs are reasonable and such efforts may be well justified given the long-term threat, economic and otherwise, that global climate change represents.
Q: If we increase the price of fuels, say through a carbon tax or an energy tax, can we mitigate or avoid rebound effects?
A: Technically, yes. Price-induced efficiency improvements, whether in response to exogenous energy price increases (changes not caused by policy that is) or successful policy efforts to price carbon emissions or impose energy taxes, should not be expected to result in significant rebound. However, as we write in the report (p. 53), "to fully avoid rebound effects, energy price increases must be sufficient to keep the final price of energy services constant despite improvements in energy efficiency, eliminating any net productivity gains from the efficiency measures." That is, in rough terms, if energy efficiency drives down the price of energy services by 30% or 50%, then energy prices would have to increase through carbon taxes or fees by an equivalent 30% or 50%.
Achievement of deep reductions in energy demand and associated carbon emissions through price induced efficiency will therefore require substantial and rising energy prices over time and sustained over the multi-decadal periods relevant to climate policy, such that rising energy prices keep pace with the improvements in energy productivity.
Furthermore, if revenues collected through carbon pricing, energy taxes, or other efforts to raise energy prices are reinvested into economically productive ends, macroeconomic rebound effects may result, so the precise use of revenues will determine the efficacy of these policies in curbing rebound.
As we conclude in the report:
"Thus, carbon pricing policies (e.g., carbon taxes or cap and trade systems) and energy taxes offer potential tools to mitigate some or all of the energy demand rebound resulting from efficiency improvement - although implementing such policies faces practical challenges and will invariably encounter the political difficulties inherent to policy efforts that seek to impose energy price increases that will result in loss of economic welfare (ignoring potential benefits of avoided economic externalities).”
Q: I read that your study had been "debunked" by Jonathan Koomey, an energy expert at Stanford University. What do you say to that?
A: Dr. Koomey has done no such thing, as he clarifies in a post at his own blog here. Koomey writes, "It will take time to review the technical questions in the detail this issue deserves, so I'll hold off on stating any conclusions until that work is done."
Joseph Romm of Climate Progress has misrepresented Koomey's work, claiming that "Some of the nation's top energy experts have debunked" our report, linking to a memo from Koomey as his sole evidence. There has been no "debunking" of the the Breakthrough Institute report surveying that literature nor even a serious attempt to debunk it.
A more up to date and unedited compilation of the key emails in that dialog can be read here, if the reader cares to delve deeply into this discussion and see for themselves. Note that the discussion is ongoing.
Q: I read a blog post by staff from the Natural Resources Defense Council who said that your report "blames a host of evils on efficiency, but fails to back up their accusations with facts." Is that true?
No. Far from blaming below-cost efficiency for "evils" we praise it as good for economic growth and welfare. However, we do point out that it can increase energy consumption, and that efforts to reduce greenhouse gas emissions cannot rely, as many leading analysts to, on simplistic claims that energy efficiency results in direct energy consumption declines.
Steven Sorrell of the University of Sussex in England headed up a similarly comprehensive review of the evidence for rebound effects published by the UK Energy Research Center in 2007 and originally commissioned by the UK government. In reply to NRDC's David Goldstein and Ralph Cavanagh, he wrote:
"[T]he claim that the Breakthrough Institute "fails to back up its accusations with facts" is plain wrong. Their report is based upon a large volume of empirical evidence in the academic literature. I reviewed this a few years ago - [link] - and the Breakthrough report brings this up to date." As Mr. Sorrell cautious, "[T]his topic [rebound effects] needs intelligent and careful research to help us understand it better, to improve the quantitative estimates, to reduce the uncertainties and to figure out what we can do in response. Simply dismissing it out of hand," as Goldstein and Cavanagh have tried to do, "will get us nowhere."